I joined a Twitter Space earlier this month, attracted by the topic – Basic Financial Advice. The star of the show was a handle who regularly tweets on Indian politics. This time, he was advising people about finances.
A question put to him was, “should I invest abroad?” He suggested that the individual asking the question restricts himself to Indian stocks, after all, we know “our companies” better. According to him, tech stocks like Apple, Alphabet and Facebook have done well so many are “getting swayed”, but the U.S. market has only put up such numbers over the past one year.
BAD advice. Here's why:
- The U.S. has experienced its longest bull run that began in March 2009. So it was not a 12-month return by which people were “getting swayed”.
- Global investing is not limited to FAANG stocks. Individuals also want to invest in Nvidia (artificial intelligence), Home Depot, Starbucks, Coca-Cola, Tesla, BlackRock, and so on and so forth.
- Neither is global investing restricted only to the U.S. market.
- Global investing allows you to get exposure to sectors that are not publicly listed in India; mining stocks and electric vehicle batteries, for instance. India corners just 2.5% of the global market cap. An investor focused only on India is missing out on some really good investments.
- Global investing does not mean you have to buy the stocks, you can even invest in mutual funds that invest abroad, directly or via feeder funds.
- Investing abroad is an excellent form of diversification. Diversification is measured across numerous dimensions: assets, stocks, industries, sectors, and strategy. And it is not rare to find investors fairly well spread along these lines. However, many investors ditch diversification at the border.
Please read 4 reasons you must consider global investing.
Another individual asked him how she could convince her parents to have some equity exposure. Pat came the reply: There is no need for retired people to invest in equity.
BAD advice. Here's why:
If an individual retires at the age of 60, chances are she may live up to the age of 85. So her portfolio must be able to sustain her for 25 years! The portfolio needs equity to beat inflation and provide capital appreciation. Hence, a portion of a retiree’s portfolio must be in equity, or at least a hybrid product.
Let me thrust a tweet at you, this by an American.
Would you rather get paid $10,00,000 right now, or $50 for the rest of your life? I’ll take Option B. That’s what passive income is. Find a way to make passive income, it’ll change your life.
A few hours later, a follow-up tweet was posted by the same handle stating:
I made a mistake. I was at the gym doing cardio. Was typing too fast. I did the math, I’m like what the heck was I thinking? It’ll take 1,666 years to make $9,99,600. (And some emojis were added for effect).
BAD advice. Here's why:
Passive income refers to cash flows from sources other than your employer or contractor. It is true that passive income is a boost all of us could do with. It adds a great deal of stability to the portfolio and gives you that nudge towards financial freedom. If it is a significant stream of income, it could really augment your efforts to build wealth. In other words, it has the potential to “change your life”. On that count, it was bang on.
Having said that, the above hot take is disastrous. Bypassing a huge sum of money is to completely ignore the Time Value of Money. That same unit of money will buy you less three years down the road, thanks to inflation. What would be the worth of $50, a decade down the road?
On the other hand, let’s say you take the lumpsum and invest smartly. You could buy property and invest in a few stocks. The property will provide you with rental income and the stocks with dividends. Over a decade or so, both would have appreciated in value and you would be able to sell at a tidy sum. So you get the dual benefit of capital appreciation with passive income.
This, dear reader, is the reason why solely relying on Social Media for financial advice is disastrous. By SM, I mean FinTwit (Twitter), FinTok (Tik Tok), Quora, Reddit, Instagram and Facebook. Even if the advice is not deceitful or terrible, it can be very misleading.
Please remember this when you are drawn to a particular account or handle.
- Not everyone is equipped to tell others what to do with their finances, even if they think they are.
- Just because an individual is an influencer in one field (actor, singer, political analyst) it does not mean they have any sophisticated knowledge of personal finance to guide you.
- People express themselves with a great deal of confidence, don’t get carried away. I once told an individual on Twitter that he must have a fair value estimate for his stock to decide whether it is overvalued or not. A non-finance handle jumped in to say that valuation is a dead concept after 2008. He got a few “likes” for that tweet.
- Check credentials. If the finance handle is anonymous, don’t take it too seriously. If the handle is not anonymous, do a search online to garner more information.
Please remember this when you get actual personal finance assistance.
The person doling out the advice is not in the same situation you are in. What worked for her might not work for you.
The financial resilience of each family differs. People who live paycheque-to-paycheque have different circumstances from those who have a tidy sum stashed away. Some families are focused on survival, and that requires a different mindset from thriving.
Everyone’s story is different. Some are motivated by luxury, others love a good bargain. Some are motivated to save, others live for the moment. Naturally, the advice to each will differ.
Align your money with your goals. Blanket rules thrown around may not work in your situation. Personal finance is very nuanced.
Please read There is no such thing as a typical investor.
Honestly answer these questions before you make a move.
- Am I feeling pressured into buying a fund or a stock?
- What is the reason I am investing? Do I believe it is a good fit in my portfolio or am I doing it because I don’t want to miss out on what’s happening?
- Do I understand the investment?
- If it is a stock, has it already skyrocketed in price?
- Does it feel like a huge gamble? Will I struggle financially if I lose money?
- Is the claim fantastical? Does it promise to double to triple my money in a short period.
Please read 8 insights on getting wealthy.
Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.
